Working Paper: NBER ID: w16235
Authors: Steven Shavell
Abstract: Although the corrective tax has long been viewed by economists as a theoretically desirable remedy for the problem of harmful externalities, its actual use has been limited, mainly to the domain of pollution. Liability, in contrast, has great importance in controlling harmful externalities. I compare the tax and liability here in theory and suggest that the conclusions help to explain the observed predominance of liability over taxation, except in the area of pollution. The following factors are emphasized in the analysis: inefficiency of incentives under taxes when, as would be typical, it would be impractical for the state to incorporate into taxes all of the variables that significantly affect expected harm; efficiency of incentives under strict liability, which requires only that actual harms be measured; efficiency of incentives to exercise precautions under the negligence rule; administrative cost advantages of liability deriving from its being applied only when harm occurs; and dilution of incentives under liability when suit would be unlikely or injurers would not be able to pay fully for harms caused.
Keywords: corrective tax; liability; harmful externalities; pollution; economic analysis
JEL Codes: H21; K32; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corrective taxes (H23) | expected harm moderation (I12) |
| strict liability (K13) | behavior of injurers (K42) |
| strict liability (K13) | expected harm (I12) |
| negligence rule (K13) | overall level of harmful activity (K42) |
| corrective taxes (H23) | harmful activities (K42) |
| strict liability (K13) | controlling harmful activities (K42) |